Principles of Oil and Gas Lease Analysis: Common Clauses: Principles of Oil and Gas Lease Analysis, #1

By Marsha Breazeale

This reference book was written by an oil and gas lease professional with over 40 years of experience in the industry, for the purpose of training other oil and gas lease professionals.  It contains a large number of oil and gas lease clauses found in recorded and unrecorded leases, each with an assortment of examples of that same type of clause.  

This book serves as an important training tool for the oil and gas lease professional to learn how to read and comprehend lease clauses correctly.  The professional also learns how to extract the important data from each clause, for data entry into the oil and gas lease record.

A complete copy of each clause is given, with the important words and phrases bolded and italicized, then reduced to a simplified version for easy reading.  The reader then is provided the method of analysis for the clause, management policies applications, computer database applications, and internal workflow procedures for the clause normal to the industry.  When applicable, the examples also point out when a particular clause can conflict with other clauses in an oil and gas lease, and what action is recommended for the lease analyst when they incur such a conflict during their analysis.  79,162 words.

• Language: English
• Publisher: Oil Patch Press
• Release date: Dec 26, 2018
• ISBN: 9780996551977

Marsha Breazeale

Marsha Breazeale is an oil and gas land professional with over 40 years of experience, certified by the National Association of Division Order Analysts and by the National Association of Lease and Title Analysts. She holds a Masters in education with emphasis in corporate training.

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Introduction

Lowe (2004) writes,

The key to understanding the oil and gas lease is (1) to identify the fundamental goals that a lessee has in leasing, and (2) to bear in mind the nature of the transaction between the lessor and the lessee.  The first is important to understanding why leases are structured as they are.  Courts often refer to the second in resolving disputes (Lowe, 2004, p. 169).

The lease as the sum total of its clauses is meant to memorialize the transaction between the lessor and lessee.  If the lease does not contain a particular clause, the lessor and lessee did not agree to it.  If the lease does contain a particular clause, the lessor and lessee agreed on the intent of that clause at the time of signing.

The lease analyst and division order analyst working for the company that either took the lease as the Lessee, or acquired the lease by assignment after it was created, has no personal knowledge of the intent behind any particular clause.  The only insight possessed by the analyst is what is printed in the lease, or what information they can gather second-hand from the landman if the analyst’s employer is the original Lessee in the lease.

Nevertheless, what good is understanding the intent of a given clause, if the analyst cannot determine how its function interacts with the functions of the other clauses in the lease?  The interaction between lease clauses lies at the core of lease analysis and division order analysis.  But before either analyst can begin analyzing, certain skills must be acquired through careful training and still others acquired through experience.   The most important skills needed that can be acquired through training and endless practice are comprehension and critical thinking skills.

The format of this book is designed to lead the reader through the labyrinth of legalese, rules and exceptions, and number of choices for application of any given lease clause in the lease records of a land database.  Acquiring the analytical skills needed to be a superior lease analyst, one that companies value highly and compensate accordingly, requires first the comprehension skills which have already been discussed.  While comprehension skills are acquired best through repetition, the critical thinking skills to extract important data and apply it to the land database are acquired best by examples.  Examples allow a trainee to see how someone already possessing those skills approaches, analyzes, and applies each lease clause to the everyday work environment.

Comprehension Training

In this book, each clause is labeled with a name commonly used in the industry, for the reader to anchor the knowledge that follows.  As many versions of a clause as deemed important for the learning process, and to encourage repetition, are presented for each clause type.  The entire clause, as it appears in an oil and gas lease filed of record somewhere, is presented.  Each example differs in some respect with the other examples for that type, to give the reader as broad an experience base as deemed helpful for beginning their journey of acquiring comprehension skills.

A general explanation of the clause, its usual purpose, and other important information is provided before the first Example is given.

Example

For each example given, the important words and phrases in the clause are shown in bold italics and each critical word or phrase is also underlined.  This system of presentation allows the reader to read the entire clause from beginning to end, while the brain subconsciously begins to recognize the key words or phrases from which the analyst will gain an understanding of the meaning of the clause.  It is also from these bolded and underlined words, numbers, and phrases that the analyst will choose to extract data to be entered into the land database.

Simplified.  The Simplified version follows the example given, containing only the important words and phrases that are bolded in the example.  All other extraneous, redundant, or otherwise not important surplusage is removed.  By lifting the less necessary verbiage out and flowing together the important and critical passages, a simplified paragraph is created that is more easily understood by the reader.  Those readers still in the beginning stages of their career as a land administration analyst would be well advised to spend quality time comparing the full Example version of the clause to the Simplified version, to begin the process of understanding just why those particular words or phrases were chosen as important and the others were not.  For more experienced analysts, the same exercise will help refresh and sharpen the comprehension skills already in place.

Critical Thinking Skills

The technical name for teaching critical thinking skills is cognitivism.  It involves a learner actively acquiring knowledge using an active learning process during which learning passes from the teacher to the learner.  Learning to read, understand, and connect oil and gas lease clauses together based on their interaction to satisfy a legal purpose requires critical thinking.  All analysts, the author included, travel a constant journey to read, understand, and connect the increasing number of complex clauses appearing in modern oil and gas leases.

This is why, for the purpose of encouraging development of critical thinking skills in the industry analysts of today and tomorrow, this book adds three important areas of analysis that follow the mastery of comprehension of the clause.  Those areas are management policies applications, database applications, and internal workflow procedures.

Management Policies Applications.  Every oil and gas company has the right to decide the level of financial risk it is willing to take in any given transaction.  For this reason, some companies will make ownership changes to their database based only on a letter or even a phone call. Other companies require not only a copy of the proper documentation, but a copy bearing recording information.  Still others will require certified, recorded copies, bearing certification by the county clerk or court clerk as the case may be.

One of the most important areas that an analyst must learn first is the limit of authority granted to the analyst by management to make business decisions.  The employer has a duty to inform the analyst of the basic guidelines regarding documentation requirements, time deadlines for completing certain tasks, and a host of other directives within the framework of which the analyst performs their work.  But as many seasoned analysts will readily admit, the work is sprinkled with borderline, gray, or otherwise out-of-the-ordinary transactions.  It is the duty of the analyst to recognize when an item of work is sufficiently gray as to require a special decision because none of the company’s guidelines or directives should apply.  Too often, beginner analysts fail to learn to recognize these lines in the sand, and their career suffers harm as a result.

This section of the Example overview includes a brief walk through any potential issues most commonly left to management to decide, or that management should carefully approve after the analyst’s decision, if the company prefers the analyst to attempt a decision.

Database Applications.  A number of lease record, land, and revenue database systems are available today.  More challenging are the number of ways that different companies can chose to utilize the same database system.  Coding such as property number and owner number schemes most often differ, definitions applied to standard codes such as lease status can differ, as well as the wide assortment of suspense codes used throughout the industry in revenue divisions of interest.  The analyst should be provided with competently-written guidelines and directives (database systems and procedures) for basic data entry functions by their employer.  Consistency and accuracy should drive the drafting of such written data entry policies.  It is the responsibility of the analyst to translate the lease clauses and all supporting documentation into captured data and to enter that data into the database in compliance with the company’s database systems and procedures.  To do it correctly and competently, this process requires comprehension skills and the critical thinking skill of recognizing the effect of one lease clause on one or more other lease clauses, or on other processes.

This section discusses any special issues related to database entry for each particular clause of which the analyst should be aware.

Internal Workflow Procedures.  No employee or contractor working for an oil and gas company is an island.  The work product of one employee is a future task for another, or a tool, or a resource.  Communication between the various departments dependent upon the information captured or produced by each is critical to the success of any company.  Some information is more critical than others are, but any information necessary to protect or fully exploit the assets of the company are at, or near, the top of the list of critical types of information.

This section discusses the interaction of the lease record information with the information available in other departments, or the need that other departments have for the information contained in the Example clause covered by it.

Final Note

This book was written by a career land administration analyst for the training and career development of other analysts.  While every effort has been made to offer a wide variety of possible management policies, database applications, and internal workflow procedures commonplace in the industry, by no means are those presented here conclusive.  Regardless of what is presented in this book, the analyst must follow the instructions and guidelines provided by their employer or client.

Ancillary Rights Clause

Ancillary rights are rights incidental to the rights to explore, drill, equip and produce wells that are granted to the Lessee by the Lessor.  The following ancillary rights are inherent to the rights to explore, drill, equip and produce wells (these rights):

~Right of ingress and egress (right to go into and out of the land described in the lease).

~Right to place equipment on the land necessary to exercise and enjoy the rights granted by the lease.

~Right to remove equipment from the land previously placed there by the Lessee, in a reasonable amount of time (Lowe, 2004, p. 273).

In Texas, the mineral rights are viewed as superior to surface land rights (Lowe, 2004, p. 173).  The reason for this is simple: without the right to access the minerals, and mineral rights owner owns nothing of any value.  Therefore, the three rights stated above are protected as being inherent to mineral rights.

The analyst should look for permissions (additional rights) and restrictions, if any, stated elsewhere in the lease for each of the inherent rights above, and additional ancillary rights granted by the Lessor.  Additional ancillary rights granted to the Lessee can include the following (among others), but must be stated to be granted:

~Use in its operations, free of cost, any oil, gas, water and/or other substances produced on the leased premises;

~Damage to buildings and other improvements now on the leased premises, and to timber and growing crops, such damage unavoidable in the normal course of operations, as long as Lessee pays for any and all such damage;

~Lay pipelines, build roads, tanks, power stations, erect telephone and power lines and construct other facilities on and over and across the leased premises as necessary by Lessee to produce, save, take care of, treat, transport and own the production obtained from the lease.

Example 1

"In exploring for, developing, producing and marketing oil, gas and other substances covered hereby on the leased premises in primary or enhanced recovery, Lessor hereby grants and conveys to Lessee the right of ingress and egress along with the right to conduct such operations on the leased premises as may be reasonably necessary for such purposes, including but not limited to geophysical operations, the drilling of wells, and the construction and use of roads, canals, pipelines, tanks, water wells, disposal wells, injection wells, pits, electric and telephone lines, power stations, and other facilities deemed necessary by Lessee to discover, produce, store, treat and transport production. In exploring, developing, producing or marketing from the leased premises, the ancillary rights granted herein shall apply (a) to the entire leased premises described above, notwithstanding any partial release or other partial termination of this lease; and (b) to any other lands in which Lessor now or hereafter has authority to grant such rights in the vicinity of the leased premises.  No surface location for a well shall be located less than 200 feet from any house or barn now on the premises or other lands used by Lessee hereunder without Lessor’s consent, and Lessee shall pay for actual damage caused by its operations to buildings and other improvements now on the leased premises, or such other lands, and to the commercial timber and growing crops thereon.  Lessee shall have the right at any time to remove its fixtures, equipment and materials, including well casing, from the leased premises or such other lands during the term of this lease or within a reasonable time thereafter."

Simplified.  [F]or, developing, producing and marketing oil, gas and other substances covered hereby, Lessor hereby grants and conveys to Lessee the right of ingress and egress along with the right to conduct such operations as may be reasonably necessary. In exploring, developing, producing or marketing from the premises, the ancillary rights granted shall apply (a) to the entire leased premises described above, notwithstanding any partial release or other partial termination of this lease; and (b) to any other lands in which Lessor now or hereafter has authority to grant such rights in the vicinity of the premises.  No location for a well shall be less than 200 feet from any house or barn without Lessor’s consent, Lessee shall pay for actual damage caused by its operations to buildings and other improvements now on the leased premises.  Lessee shall have the right to remove its fixtures, equipment and materials, including well casing, from the premises during the term or within a reasonable time thereafter.

Method of Analysis.  The first ancillary right stated in Example 1 is the right of ingress and egress, which is permission to go physically into and out of the land.  Stating that this right is granted indicates the Lessor is also the surface owner, or has sufficient control of the surface to grant this permission.  Some leases expressly prohibit ingress and egress, disallowing operations on the surface of the land.  Other means of access to the oil or gas must be used.

The second ancillary right is along with the right to conduct such operations as may be reasonably necessary.  The remainder of the clause is where restrictions to these permissions would normally be found.  But, upon reading this clause, the analyst sees that the sub-sentence (a) grants these permissions for the entire land area under lease for the life of the lease, even if part of the surface area is terminated or expires.  Surprisingly, sub-sentence (b) extends these same two permissions to other lands not even included in the lease, but in the vicinity of the lease.  The lands do not need to be contiguous to the leased lands or that would have been stated.  In the vicinity is a subjective term meaning nearby, but the exact distance of what constitutes nearby would ultimately rest with the Lessor.  This is not a restatement of the Mother Hubbard clause, because that clause serves to lease the mineral estate of adjacent or contiguous land not properly described in the lease description but should have been (Lowe, 2004, p. 450).  The language in the Example 1 clause serves to allow use of the surface only of any adjacent, contiguous, or nearby land owned or claimed by the Lessor.

The clause above does contain one restriction.  The Lessor requires the Lessee to get the Lessor’s permission to place a drilling pad within 200 feet of any structure currently on the leased premises.  It is questionable whether an operator would want to risk damage to a building’s foundation, or distress leading to illness in (and damages to) the barn animals unless the ability to access the geological structure indicated drilling in that precise location was required.

Management Policies Applications.  The analyst should inquire about management policies regarding mandatory communications between departments.  The analyst could review internal workflow procedures at the company to see what communication, if any, should be made to operations, engineering and geology that ingress and egress for other lands controlled by Lessor in the vicinity are available for conducting operations or at least staging equipment for operations.  This information would be helpful at the beginning stages of identifying a well site for a well proposal.

Database Applications.  If the land database system being utilized allows special remarks, and if the company’s database usage rules allow such a remark, it might prove helpful to have a remark regarding free use of lands owned by Lessor near this lease.

Internal Workflow Procedures.  Other than the usefulness for operations and engineering personnel to know about the free use owned by Lessor near the leased lands, there are no other internal workflow procedures considerations apparent for this clause

Example 2

"Lessee may use in its operations, free of cost, any oil, gas, water and/or other substances produced on the leased premises, except water from Lessor's wells or ponds. The right of ingress and egress granted hereby shall apply to the entire leased premises described in Paragraph 2 above, notwithstanding any partial release or other termination of this lease with respect thereto. If expressly requested in writing by the surface owner, Lessee agrees to bury pipelines across cultivated land below ordinary plow depth, as such depth may be determined at the time of burial. After the pipeline has once been laid below such depth, Lessee shall not thereafter be required to restore the ground cover, or to lower, or to remove such pipeline unless the surface owner first agrees in writing to bear the entire cost thereof, and advances to Lessee the estimated cost thereof. No well shall be located less than 200 feet from any house or barn now on the leased premises without Lessor's consent, and Lessee shall pay for damage caused by its operations to buildings and other improvements now on the leased premises, and to timber and growing crops thereon. Lessee shall have the right at any time to remove its fixtures, equipment and materials, including well casing, from the leased premises during the term of this lease or within a reasonable time thereafter. Lessee may lay pipelines, build roads, tanks, power stations, erect telephone and power lines, and construct other facilities deemed necessary by Lessee on and over and across the leased premises and other lands owned or claimed by Lessor adjacent and contiguous thereto to produce, save, take care of, treat, transport and own products granted by this lease."

Simplified.  Lessee may use in its operations, free of cost, any oil, gas, water and/or other substances produced on the premises, except water from Lessor's wells or ponds. The right of ingress and egress granted shall apply to the entire premises notwithstanding any partial release or other termination of this lease. If expressly requested in writing by the surface owner, Lessee agrees to bury pipelines below plow depth.  After the pipeline has been laid, Lessee shall not be required to restore the ground cover, or to lower, or remove such pipeline unless the surface owner agrees in writing to bear the entire cost, and advances to Lessee the estimated cost. No well shall be located less than 200 feet from any house or barn now on the premises without Lessor's consent, and Lessee shall pay for damage caused by its operations to buildings and other improvements now on the leased premises, and to timber and growing crops. Lessee shall have the right at any time to remove its fixtures, equipment and materials, including well casing, from the premises during the term of this lease or within a reasonable time thereafter. Lessee may lay pipelines, build roads, tanks, power stations, erect telephone and power lines, and construct other facilities deemed necessary by Lessee on and over and across the leased premises and other lands owned or claimed by Lessor adjacent and contiguous to produce, save, take care of, treat, transport and own products granted by this lease.

Method of Analysis.  This version of the clause combines the separate ancillary right stated in each sentence into one large paragraph:

(1)Lessee may use in its operations, free of cost, any oil, gas, water and/or other substances produced on the premises, except water from Lessor's wells or ponds.  These are rights attached to the surface ownership, which is servient to the mineral estate (Lowe, 2004, p. 173).

(2)The right of ingress and egress granted shall apply to the entire premises notwithstanding any partial release or other termination of this lease.  This right also is attached to the surface, and granted without being expressed, because at least in Texas the surface ownership is servient to mineral ownership (Lowe, 2004, p. 173).

(3)  "If expressly requested in writing by the surface owner, Lessee agrees to bury pipelines below plow depth.  After the pipeline has been laid, Lessee shall not be required to restore the ground cover, or to lower, or remove such pipeline unless the surface owner agrees in writing to bear the entire cost, and advances to Lessee the estimated cost."  The laying of a pipeline to carry production from the wellhead to market is part of the equipping for which the mineral owner is allowed to use a necessary portion of the surface.

(4)  No well shall be located less than 200 feet from any house or barn now on the premises without Lessor's consent, and Lessee shall pay for damage caused by its operations to buildings and other improvements now on the leased premises, and to timber and growing crops.  This also is part of the needful use of the surface estate to conduct operations for the use and enjoyment of the mineral estate.

(5)  Lessee shall have the right at any time to remove its fixtures, equipment and materials, including well casing, from the premises during the term of this lease or within a reasonable time thereafter.  Again, this is needful use of the surface, but the Lessee is agreeing to limit the time frame in which removal will be allowed.  However, it must be allowed.

(6)  Lessee may lay pipelines, build roads, tanks, power stations, erect telephone and power lines, and construct other facilities deemed necessary by Lessee on and over and across the leased premises.  All of these are needful uses of the surface state for the use and enjoyment of the mineral estate.

The last half of the final sentence, and other lands owned or claimed by Lessor adjacent and contiguous to produce, save, take care of, treat, transport and own products granted by this lease is not an ancillary right, but a new right added to this lease not servient to the mineral estate under the leased lands.  Use of the surface as necessary to explore, drill, equip, and produce a well applies only to the surface of the lands in which the mineral rights are being leased. For this owner to make available adjacent surface lands for the purpose of exploring, drilling, equipping, and producing the leased lands is an additional express right, not an ancillary right in the leased lands.  These are lands other than Mother Hubbard lands.

Management Policies Applications.  When selecting the lease tract where the drill pad, retention ponds, tanks, and other equipment will be placed, the landman usually will carefully review the oil and gas lease covering the area of land selected, but more importantly, a prudent operator will seek a Surface Use Agreement from the surface owner separate and apart from the oil and gas lease.

Database Applications.